PRINTMarket Update -- Economic Comment
August 6, 2007
Investors are currently debating whether or not the Fed should state at this week’s FOMC meeting that inflation risks are no longer the main concern, but are equally weighted with growth risks. Such a move would pave the way for a rate cut should one be required later this year. If the Fed were to shift to a balanced risk assessment, it would be a significant change in sentiment from mid-July, when Chairman Bernanke made it abundantly clear that the Fed is not overly concerned about growth but is clearly concerned about inflation.
The change of view among investors is predicated on the repricing of risk that is currently underway in the financial markets. While most agree this is a healthy development, there is widespread disagreement about the ramifications for the general economy. Investors are positioned with a front-line view of the flames, where it appears that the fire is burning out of control. The Federal Reserve, however, has a bird’s-eye view of the entire landscape, and they will be studying the potential fire blocks before pulling out the hose.
We think the Fed will keep the 5.25% federal funds rate in place at the conclusion of the FOMC meeting tomorrow. We also think they will retain their inflation bias and reiterate that they expect the economy to expand at a moderate pace in coming quarters. We expect the Fed will alter the FOMC statement enough to indicate that they are not asleep at the switch and stand ready for action if necessary. The tone of the statement is unlikely to be one that suggests action is imminent, however, and this may be disappointing to investors who are looking for the Fed to put out the fire.
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